The long-term capital gains tax on mutual funds is 10%, which makes investment in dividend yield funds more tax efficient," Rupesh Bhansali said.
ET Intelligence Group: Dividend yield funds are gradually attracting investor attention given their tax efficiency and the ability to limit the downside of a portfolio during volatile market conditions. This category of funds has attracted inflows of Rs 6,542 crore over the past two-and-a-half years compared with an outflow of Rs 600 crore in the 18 months ended December 2020, according to the data from the Association of Mutual Funds in India (AMFI).
"Given the high market volatility over the past three years, it makes sense to invest in companies which are not only profitable but also provide dividends to shareholders," said Harshvardhan Roongta, CFP, Roongta Securities. He added that such companies are safe havens as they protect the downfall of the portfolio value to a certain extent.
In terms of taxation, it is profitable to invest in dividend yield funds rather than directly buying the stocks of dividend paying companies. Rupesh Bhansali, head of mutual funds at GEPL Capital, noted that dividends in the hands of investors are taxed at the marginal tax rate, which is 30%, at the higher end of the tax slab and may also incur a surcharge while the tax structure for mutual funds is more favourable. "The long-term capital gains tax on mutual funds is 10%, which makes investment in dividend yield funds more tax efficient," Bhansali added.
Another reason for the rising popularity of dividend yield funds is improving profitability of the public sector undertakings (PSUs), which form a large part of dividend yield funds.
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